Varun sahni impact investment partners

SERIES EDITORS

Muthiah Alagappa East-West Center Amitav Acharya

American University David Leheny

Princeton University

Alastair Iain Johnston Harvard University

T.V. Paul McGill University

Randall Schweller The Ohio State University

INTERNATIONAL BOARD

Rajesh M. Basrur Nanyang Technological University

Barry Buzan London School of Economics

Victor D. Cha Georgetown University Thomas J. Christensen Princeton University

Stephen P. Cohen Brookings Institution

Chu Yun-han

Academia Sinica Rosemary Foot

University of Oxford Aaron L. Friedberg Princeton University

Sumit Ganguly Indiana University, Bloomington

Avery Goldstein University of Pennsylvania

Michael J. Green Georgetown University; Center for Strategic and International Studies

Stephan M. Haggard University of California, San Diego

G. John Ikenberry Princeton University

Takashi Inoguchi Chuo University

Brian L. Job University of British Columbia

Miles Kahler University of California, San Diego

Peter J. Katzenstein Cornell University Khong Yuen Foong University of Oxford

Byung-Kook Kim Korea University

Michael Mastanduno Dartmouth College

Mike Mochizuki

The George Washington University

Katherine H. S. Moon Wellesley College

Qin Yaqing China Foreign Affairs University

Christian Reus-Smit Australian National University

Varun Sahni Jawaharlal Nehru University

Etel Solingen University of California, Irvine

Rizal Sukma CSIS, Jakarta

Wu Xinbo Fudan University

Studies in Asian Security

A SERIES SPONSORED BY THE EAST-WEST CENTER

Muthiah Alagappa, Chief Editor Distinguished Senior Fellow, East-West Center

The Studies in Asian Security book series promotes analysis, understanding, and explanation of the dynamics of domestic, transnational, and international security challenges in Asia. The peer-reviewed publications in the Series analyze contemporary security issues and problems to clarify debates in the scholarly community, provide new insights and perspectives, and identify new research and policy directions. Security is defined broadly to include the traditional political and military dimensions as well as nontraditional dimensions that affect the survival and well being of political communities. Asia, too, is defined broadly to include Northeast, Southeast, South, and Central Asia.

Designed to encourage original and rigorous scholarship, books in the Studies in Asian Security series seek to engage scholars, educators, and practitioners. Wideranging in scope and method, the Series is receptive to all paradigms, programs, and traditions, and to an extensive array of methodologies now employed in the social sciences.

The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue. Established by the U.S. Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options. The Center is an independent, public, nonprofit organization with funding from the U.S.

government, and additional support provided by private agencies, individuals, foundations, corporations, and governments in the region.

The Making of Northeast Asia

Kent Calder

Min Ye

Published in the East-West Center sponsored Series in Asian Security under the auspices of the John Hopkins University, SAIS Reischauer Center for East Asian Studies

Stanford University Press

Stanford, California

© 2010 by the Board of Trustees of the

Leland Stanford Junior University

All rights reserved

No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press.

Printed in the United States of America

Library of Congress Cataloging-in-Publication Data

Calder, Kent E.

The making of Northeast Asia / Kent Calder and Min Ye. p. cm.—(Studies in Asian security)

Includes bibliographical references and index.

9780804775052

1. Regionalism—East Asia. 2. East Asia—Politics and government. 3. East Asia—Economic integration. 4. East Asian cooperation. I. Ye, Min. II. Title. III. Series: Studies in Asian security.

JQ1499.A38R43235 2010

320.951—dc22

2009049773

This book is printed on acid-free, archival-quality paper.

Typeset at Stanford University Press in 10/13.5 Bembo

To XIA AIYU and to the memory of ROSE EYRING CALDER

Table of Contents

SERIES EDITORS - Muthiah Alagappa East-West Center Studies in Asian Security - A SERIES SPONSORED BY THE EAST- WEST CENTER Title Page Copyright Page Dedication List of Tables Table of Figures Preface A Note on Conventions Flashback - A Simple Journey Abbreviations PART I - INTRODUCTION AND THEORY 1 - Northeast Asia in Global Perspective 2 - Theories of Asian Institutional Development Changing Context and Critical Junctures

PART II - HISTORICAL CONTEXT: CRITICAL JUNCTURES 3 - The Organization Gap in Historical Perspective War in Korea and the First Critical Juncture 4 - Overcoming the Organization Gap Crises and Critical Junctures (1994–2008)

PART III - REGIONAL DEVELOPMENT 5 - Visions of a More Cohesive Regional Future 6 - A Deepening Web of Regional Connectedness

PART IV - NATIONAL TRANSFORMATION Regional Policy-making and Domestic Politics 7 - The Transformation of China’s Regional Policies 8 - Catalysts Korea and ASEAN in the Making of Northeast Asia

9 - Japan’s Dilemma and the Making of Northeast Asia 10 - The United States and Northeast Asian Regionalism

IN CONCLUSION 11 - Summing Up

REFERENCE MATTER Index Studies in Asian Security - A SERIES SPONSORED BY THE EAST- WEST CENTER

List of Tables

TABLE 1.1 TABLE 2.1 TABLE 3.1 TABLE 3.2 TABLE 7.1 TABLE 9.1

Table of Figures

FIG. 1.1 FIG. 1.2 FIG. 1.3 FIG 1.4 FIG. 2.1 FIG. 3.1 FIG. 4.1 FIG. 4.2 FIG. 4.3 FIG. 5.1 FIG. 6.1 FIG. 6.2 FIG. 6.3 FIG. 6.4 FIG. 6.5 FIG. P4.1 FIG. 7.1 FIG. 7.2 FIG. 8.1 FIG. 8.2 FIG. 9.1 FIG. 10.1 FIG. 10.2 FIG. 10.3 FIG. 10.4 FIG. 10.5

Preface

The evolution of social, economic, and political ties among China, Japan, and Korea has fateful importance for global affairs in the twenty-first century. Japan and China are the largest economies on earth, apart from the United States, and together hold well over half of the world’s foreign-exchange reserves. South Korea is an advanced nation in its own right. The Korean peninsula’s internal uncertainties—particularly North Korea’s nuclear and missile programs—could impact both Sino-Japanese relations and the broader world. Japan, China, and Korea are all technological powers of consequence in different political-economic spheres.

If the Northeast Asian trio actively collaborate, they could become the catalyst for a new global order—one of the few potential challenges to U.S. global hegemony. If the trio finds itself in conflict, its struggles could destabilize Asia, and perhaps the world. Northeast Asia holds, in short, a potential to reshape the world as we know it that is matched only by uncertainties in the Middle East.

Northeast Asia and its future have fascinated both of us throughout most of our careers. One coauthor has lived eleven years in Japan, taught at Seoul National University in Korea, and traveled more than 150 times across the Pacific, to all three countries of this region, over half a century. The younger co-author was born and raised in China, graduated from Beijing University, and has lived and traveled in Korea and Japan also. Together we have interviewed leaders, conducted seminars, and visited locations across the region—ranging from Korea’s North-South railway station near Kaesong to Chiang Kai-shek’s birthplace on the Chinese mainland—that bear powerful evidence to the historic transformations now underway.

This book has been close to a decade in the making—a decade over which we have seen our early premonitions—once intensely controversial— increasingly vindicated. The imagination of the senior coauthor was piqued first by the geopolitical changes set in motion by the historic Pyongyang summit of June, 2000, about which he wrote (“The New Face of Northeast

Asia”) for the Winter, 2001 issue of Foreign Affairs. Research at the East- West Center as a Pohang Fellow during the summer and fall of 2001 allowed him to deepen these conceptions further.

We began working as a team in the spring of 2002, just as the junior author, Min Ye, arrived in Princeton. Our first collaboration, as faculty advisor and graduate student, came in the fall of 2002, when we did a readings course on comparative regionalism together. This led to a joint paper on critical junctures and East Asian regionalism, which was published in The Journal of East Asian Studies (2004), and a decision to write this book together. In that connection, Min spent close to a year in residence at the SAIS Reischauer Center, where she completed first drafts of Chapters 5, 6, and 7. She has also done critical quantitative research and graphic presentation throughout. Cooperative research work in Korea and China, as well as a seminar that Kent taught at Seoul National University in the summer of 2007, were also important in the development of the ideas presented here. Seminars at Beijing University, East West Center, Fudan University, Harvard University, the Japanese Institute of Developing Economies, Korea University, SAIS, Sejeong Institute, Seoul National University, Stanford University, UC Berkeley, Waseda University, and Yonsei University, as well as panels at the American Political Science Association, the Association of Asian Studies, the International Political Science Association, and the International Studies Association also gave us important feedback.

Over the course of such a long and complex project, we have many people and institutions to thank. First and foremost are our spouses and our families, whose understanding we particularly appreciate. The Reischauer Center for East Asian Studies at SAIS has provided important financial support, and this book is written under its auspices. We also warmly thank the East-West Center for its support—both through the Pohang Fellowship Program, and through generous publication support. Boston University and the Princeton- Harvard China and the World Program also contributed to the book’s production. Valued research assistance has come from Mariko de Freytas, Sato Momoko, Yoshikawa Yukie, Wang Yanan, and Zhang Qin. We are also grateful to Muthiah Alagappa, who introduced us to his fine series at Stanford University Press, and gave insightful advice throughout. Geoffrey Burns and John Feneron at the Press have also been most helpful. We are likewise

grateful to numerous academic colleagues, including Amitav Acharya, Vinod Aggarwal, Cho Lee-jae, Choo Yong-shik, Thomas Christensen, Chung Jae- ho, Bruce Cumings, Joseph Fewsmith, Fukushima Kiyohiko, Francis Fukuyama, Bill Grimes, Guo Dingping, Stephan Haggard, Han Seung-soo, Hyun In-taek, Karl Jackson, Peter Katzenstein, Kim Choong-nam, Atul Kohli, David Lampton, Haillie Lee, Lee Sook-jong, Moon Chung-in, Charles Morrison, Paik Jin-hyun, T. J. Pempel, Qin Yaqing, John Ravenhill, Gil Rozman, Bob Scalapino, Urata Shujiro, Wang Jisi, Lynn White, Yabushita Shiro, Yamazawa Ippei, Yoon Youngkwan, Zha Daojiong, and Zhang Yunling, among others, for their advice and comments along the way. Responsibility for facts and conclusions, however, must lie with us alone.

Both of us, having grown up in very different worlds, and having seen our own respective worlds change radically in recent years, cannot help but have a special interest in understanding political-economic change, both theoretically and practically. There is no higher task, for both scholarship and policy, as we see it, than understanding the forces that drive the future, in a manageable empirical context. Northeast Asia is such a context, and the forces at work there are fatefully reshaping our world, as a decade of research has shown us, and as the reader will hopefully come to see in the pages to come.

May, 2010

Kent E. Calder Washington, D.C.

Min Ye Boston, Massachusetts

A Note on Conventions

Japanese, Korean, and Chinese personal names throughout the text are presented in their countries’ conventional forms—that is, with the surname followed by the given name, in reversal of standard Western practice. We also follow the varied local conventions of Northeast Asia regarding the spelling and punctuation of given names. Regarding Korean and Taiwanese names, a hyphen is used between the characters of given names. In the case of mainland Chinese names, however, hyphens are not used. We also employ different romanization systems for Taiwanese and mainland Chinese expressions. In the Taiwanese case, we use the Wades-Giles system, commonly used in Taiwan. In the mainland Chinese case, we use the pinyin system, commonly employed in the PRC. The Ministry of Culture (MC) system of romanization is used for Korean expressions. Japanese expressions and book titles are rendered without macrons. Korea refers to the Republic of Korea, otherwise known as South Korea, unless otherwise specified.

Flashback

A Simple Journey The ferry left Shimonoseki’s pier promptly at 9:00 P.M., after dinner, on an overnight voyage traversing the Tsushima Straits to Pusan. The fare was Y3.55. Arriving on the Korean shores at first light, and after a brief tour of Pusan, the sightseeing group proceeded to Seoul by train. There they visited Kyongbok Palace, Nanzan Park, and the Botanic Garden.

Overnighting in Seoul, and following a morning excursion to the ancient Chinese settlement at Incheon, the group boarded a night train northbound. Arriving at Pyongyang at breakfast time, for a Seoul–Pyongyang fare of Y5, they spent the morning sightseeing, and enjoyed lunch, before once again boarding the Mukden train. After crossing the Yalu at Antung, passengers adjusted their watches by an hour, breezed through perfunctory Chinese customs, and continued on the South Manchurian Railway to Mukden itself, arriving around 9:30 P.M, after a pleasant, leisurely dinner onboard, offering optional Western or Japanese cuisine, for Y1.50. The next day they hired a horse carriage for a leisurely city tour, including the old city, the new city, and the Manchurian Medical College.

The year was 1928. The group had freely explored distinctive parts of Japan, Korea, and China’s Northeast, in five days. Counting accommodations, rail, and ferry fare, the cost had been less than Y50, or around US$12.00, at prevailing exchange rates. The political complications had been minimal.1

The human profile of Northeast Asia, needless to say, has changed. Yet the geography has not. And economic interdependence across the region is rising. How and when might the easy interchange that prevailed in earlier years reassert itself? And what would a more unified Northeast Asia mean for the broader world?

Abbreviations

ABMI Asian Bond Market Initiative ADB Asian Development Bank AFC Asian Financial Crisis AMF Asian Monetary Fund ANEAN Association of Northeast Asian Nations APEC Asia Pacific Economic Cooperation APSC Asia Pacific Sphere of Cooperation APT ASEAN Plus Three ARATS Association for Relations across the Taiwan Strait ARF ASEAN Regional Forum ASEAN Association of Southeast Asian Nations ASPAC Asian and Pacific Council BESETO Beijing-Seoul-Tokyo Corridor BFA Boao Forum for Asia BYS Bohai-Yellow Sea area CASS Chinese Academy of Social Sciences CCP Chinese Communist Party CEPA Closer Economic Partnership Arrangement CFC Combined Forces Command CJ critical juncture CMI Chiang Mai Initiative CSCAP Council for Security Cooperation in the Asia-Pacific DMZ demilitarized zone DPJ Democratic Party of Japan DPP Democratic Progressive Party of Taiwan DPRK Democratic People’s Republic of Korea EAC East Asian Community

EAEG East Asian Economic Grouping EAFTA East Asian Free Trade Area EAS East Asia Summit EASG East Asian Study Group EAVG East Asian Vision Group EC/EU European Community ECAFE UN Economic Commission for Asia and the Far East ECFA Economic Cooperation Framework Agreement EEC European Economic Community FDI foreign direct investment FSA financial supervisory agency (Japan) FSS financial supervisory service (Korea) FTA free trade agreement GM General Motors GND/GDP gross national (domestic) product GSDF Ground Self-Defense Force HEU highly enriched uranium IMF International Monetary Fund IT information technologies JERC Japan Economic Research Center JETRO Japan External Trade Organization JSP Japan Socialist Party KEDO Korean Peninsula Energy Development Organization KIEP Korean Institute for Economic Policy KMT Nationalist Party of Taiwan KORUS Korea-U.S. KRIHS Korea Research Institute for Human Settlement LDP Liberal Democratic Party LNG liquefied natural gas LWR light water reactor MCEDSEA Ministerial Conference on Economic Development in

Southeast Asia

METI Japanese Ministry of Economics, Trade, and Industry MIA missing in action MOF Japan’s Ministry of Finance MOFA Japan’s Ministry of Foreign Affairs MSDF Maritime Self Defense Force NAFTA North America Free Trade Agreement NATO North Atlantic Treaty Organization NDFL National Defense Foreign Language Program NEADB Northeast Asian Development Bank NEAEF Northeast Asia Economic Forum NEAT Network of East Asian Think Tanks NER Northeastern Rejuvenation Program (China) NET natural economic territories NGO nongovernmental organization NIRA National Institute for Research Advancement (Japan) NPC Chinese Communist Party National Party Congress NPT non-proliferation treaty PAFTA Pacific Free Trade Area PAFTAD Pacific Trade and Development PBEC Pacific Basin Economic Council PECC Pacific Economic Cooperation Conference PLA People’s Liberation Army (China) PRC People’s Republic of China PRD Pearl River Delta (China) ROK Republic of Korea RTA regional treaty agreement SAR Special Administrative Region SCO Shanghai Cooperation Organization SEATO Southeast Asia Treaty Organization SED strategic and economic dialogue SEF Straits Exchange Foundation SOP standard operating procedures

TCOG Trilateral Coordination and Oversight Group

TEMM Tripartite Environmental Ministers’ Meeting TRADP Tumen River Area Development Project UNDP UN Development Program VW Volkswagen WTO World Trade Organization YRD Yellow River Delta (China)

PART I INTRODUCTION AND THEORY

1

Northeast Asia in Global Perspective Northeast Asia, where the interests of three major nuclear powers and the world’s three largest economies converge around the unstable pivot of the Korean peninsula, is a region rife with political-economic paradox. It ranks today among the most dangerous areas on earth, plagued by security problems of global importance, including nuclear and missile proliferation. Despite its insecurity, the region has continued to be the most rapidly growing on earth for more than five decades. In 1960, the Northeast Asian economy—including Japan, Mainland China, Taiwan, and Korea—accounted for only 4 percent of world GDP, compared with 37 percent for the United States, Canada, and Mexico. By 2008 its GDP, as a proportion of the world total, had reached 17.7 percent, compared with 22.4 percent for the European Union (EU) and 27.6 percent for the North American free trade agreement (NAFTA).

This globally consequential share of world output is concentrated in a remarkably compact and densely populated area. As Figure 1.1 suggests, the heart of Northeast Asia’s political economy centers around the East China Sea, now plausibly called the Shanghai Circle: major cities in Japan and Korea, Hong Kong, Taiwan, Mainland China, and Macao, within three hours’ flying time of Shanghai. Within that circle, roughly the size of the United States east of the Mississippi River, live more than 1.3 billion people, who generate nearly one-fifth of global economic production.

Using purchasing power parity indicators, for many purposes a more accurate measure of economic significance than nominal GDP, Northeast Asia looms as an even more substantial entity in global economic affairs. In 2008, as indicated in Table 1.1, this area’s GDP on a purchasing-power parity (PPP) basis was $14.9 trillion, compared with $17.5 trillion for NAFTA and $15.1 trillion for the EU. Northeast Asia’s share of global total GDP in PPP terms was thus 21 percent, comparable to 24.7 percent for NAFTA and 21.3 percent for the EU.

FIG. 1.1. The “Shanghai Circle”: Economic Heart of Northeast Asia. The “Shanghai Circle” denotes areas within three hours’ flying time from

Shanghai by commercial aircraft. Virtually all areas are in China, Japan, and Korea. Direct Daily Flight Information, as of 2009: (1) Shanghai–Seoul: 2 hours, 11 flights per day; (2) Shanghai–Tokyo: 3 hours, 13 flights per day;

(3) Tokyo–Seoul: 2.5 hours, 20 flights per day; (4) Shanghai–Beijing: 2 hours, 22 flights per day; (5) Shanghai–Hong Kong, 2.5 hours: 13 flights per

day; (6) Shanghai–Taipei, 1.5 hours: 3 flights per day.

Northeast Asia has also become the world’s second largest trading region, with its share of global trade, at 18.3 percent, conspicuously ahead of NAFTA’s share at 15.7 percent and the EU’s share, at 11.1 percent. The region’s trade/ GDP ratio is also much higher than that of either NAFTA or the EU, sug-gesting that trade has been an important policy determinant for the countries involved. The growing importance of intraregional trade since the 1997 Asian financial crisis and recent challenges from the global economic downturn have thus influenced and will continue to significantly impact regional integration in Northeast Asia.

TABLE 1.1

The Northeast Asian Region in Comparative Perspective

SOURCE: World Bank, www.worldbank.org; and CIA, World Factbook, 2010. https://www.cia.gov/library/publications/the-world-factbook/index.html.

NOTES: Northeast Asia refers to the aggregate of Japan, China, South Korea, Hong Kong, and Taiwan. The data are current as of 2008.

Why Not a Broader Asian Calculus? Much scholarly attention has been given to the broader geographical

concept of “East Asia.”1 Why then the significantly narrower Northeast Asian focus that is adopted here? We take this approach because the nations of Northeast Asia are by an overwhelming margin the largest economically and the most potent militarily and technologically in the entire East Asian region, which stretches from Burma in the Southwest to Hokkaido in the Northeast.

As noted in Figure 1.2, Northeast Asia generates more than 80 percent of the total gross national product of that sprawling region, and supplies more

http://www.worldbank.org
http://www.cia.gov/library/publications/the-world-factbook/index.html
than 70 percent of its military manpower. The Association of Southeast Asian Nations (ASEAN), although by no means insignificant, is much smaller, economically and politically, even in aggregate, than the Northeast Asian region. ASEAN has thus far played a remarkably substantial role in regional integration for its size, as we shall see. Yet its heretofore salient role is an embedded Cold War artifact, with a geopolitical logic now receding, that obscures momentous subregional developments elsewhere. ASEAN has steadily been eclipsed of late by the increasingly cohesive Northern powers, in a subtle evolution vested with fateful long-term global significance, that remains inadequately understood.

FIG. 1.2. Northeast Asia and ASEAN in Comparative Geoeconomic Perspective. GDP (ppp), foreign exchange reserve, and current account

balance data are for 2008. Military expenditure data is from 2004 reporting. Military manpower and population statistics are from 2009 estimates.

Source: Original data are from Central Intelligence Agency, CIA World Factbook, 2009. WWW.cia.org. .

A second reason for our focus on Northeast Asia, related to the first, is that the resolution of these nations’ delicate mutual relationships, however difficult, has profound implications for global war and peace, because of the sheer scale, technological sophistication, and complementarity of the parties involved. Their estrangement from one another became a commonplace of international affairs, from World War II through the Cold War and beyond, quietly leveraging America’s dominance in Asia. Yet it can no longer be taken for granted.

If China, Japan, and Korea can find a peaceful, collaborative resolution to their historically rooted differences and their geopolitically driven dilemmas,2 the region will become a locus of global political, military, and financial power to an unprecedented degree. If, conversely, Northeast Asians cannot resolve their differences, vicious cycles of political-military rivalry that threaten global stability may well be unleashed. The future of this Northeast Asian triangle, in short, is a major critical uncertainty for the United States, and indeed for the world as a whole, giving much greater long-term geopolitical significance to the nuances of conflict and cooperation among them than is generally understood.

A third reason for our focus on Northeast Asia is that intraregional linkages have deepened sharply and dynamically over the past decade.3 Mutual interdependence has reached an unprecedented level among the Northeast Asian economies, even as reliance on the United States has slowly begun to decline. Social interactions among Japan, Korea, and Greater China have also come to greatly outnumber those between the subregion and other parts of Asia, making Northeast Asia an increasingly coherent and connected entity. And the deepening interaction is not purely social. Policy networks, linking top-level politicians, local governments, epistemic communities, and

http://WWW.cia.org
corporate elites to an unprecedented degree are actively engaging their counterparts across national boundaries in Northeast Asia. These diverse multilevel networks not only produce ideas for Northeast Asian cooperation but also generate concrete proposals for common action. Thus, although Southeast Asia still appears salient in many formal dimensions of East Asian integration, as an embedded consequence of Cold War struggles dating from the Vietnam War and the invasion of Cambodia, behind the scenes, Northeast Asian nations increasingly set the agenda and parameters for Asian regionalism more generally, in addition to pursuing closer trilateral cooperation among themselves. Since December 2008 they have been routinely holding full-fledged trilateral summits, independent of ASEAN.

A fourth reason for our Northeast Asian focus, in preference to a broader East Asian treatment, is that Northeast Asia stands uniquely on the cusp of historic geopolitical change, as Southeast Asia did in the 1970s. Change in Northeast Asia’s subregional alignments could sharply alter the anomalous estrangement that has prevailed there since World War II. The dimensions and possible immediacy of Northeast Asia’s fateful impending transformation urgently need to be appreciated, since intraregional commonalities and complementarities are so deep. Dramatic breakthroughs are occurring across long-frozen lines of Cold War cleavage, not least across the Taiwan Straits, allowing deep underlying complementarities to be realized for the first time in well over half a century.

Why Not Just China? The pronounced recent transnational dynamism and deepening integration

of Northeast Asia, particularly across the East China Sea and the Taiwan Straits, are becoming increasingly clear. This deepening integration is a complex, synergistic phenomenon involving the interaction of three large, proud, and suspicious—yet highly complementary and increasingly interdependent—countries. Many nevertheless ascribe the remarkable transformation of Asia in recent years largely to China alone, or to a “China Circle” of Sinic affiliates with a southern bias.4

Our analytical orientation is decidedly different. Without denying the dynamism of China itself, or the historic character of the recent detente across the Taiwan Straits, we highlight the transnational production networks, financial markets, security dialogues, and economic-policy consultations that

are developing much more broadly, and the new transnational synergies among long-standing adversaries that are emerging as traditional political barriers fall across the dynamic expanse from Hokkaido, Manchuria, and the two Koreas southward to Taipei and the Vietnamese borderlands. Northeast Asia overall, we argue, is far more than the sum of its parts, with Japan and Korea, as well as the various components of China, having key roles in the emerging overall regional political-economic equation. And those roles subtly enhance one another, pulling the locus of Asian dynamism ineluctably northward from its earlier ASEAN focus, as historical suspicions in the Northeast gradually fade and common interests steadily rise.

To be sure, country-specific thinking—about China, Japan, or Korea—for many years made perfect sense as the central focus of political-economic analysis. The dark shadow of history distorted the political economy of Northeast Asia, dividing individual countries into separate, fiercely distinctive units, making potentially promising intraregional dialogue or steps toward policy coordination difficult even among nominal allies. Japan and South Korea, for example, could not even bring themselves to establish diplomatic relations with each other until 1965—twenty years after the end of World War II, despite parallel and intimate alliance relations that both enjoyed separately with the United States. China was aloof, suspicious, and poorly integrated with the others. Japan did not normalize relations with China until 1972, and South Korea not until two decades after that. China also loomed large on the Cold War stage, as a tacit strategic partner of the United States.

China continues to be important, of course—indeed, increasingly so, from a global perspective. Yet it has grown quietly interdependent with its neighbors, as well as politically conciliatory, in new ways that have not yet been adequately presented in most previous analyses. It is to capture that new reality—the broader regional context in which a rising China is increasingly embedded, that we cast a wider net.

Northeast Asian Fusion Beginning in the early 1990s, Northeast Asia began to grow steadily more

interdependent, connected, and cohesive in socioeconomic terms, its bitter historical and geopolitical differences of that period notwithstanding. Between 1990 and 2004, intraregional commerce among Japan, South Korea,

and China doubled, to 12 percent of those nations’ total world trade, while transactions with the United States accounted for only 18 percent of their collective global total. The importance of trans-Pacific trade continued to decline. In 2008, the trade with the U.S accounted for less than 13 percent of the three countries’ global commerce, while trade among themselves was 11 percent. Historic post–Cold War developments in trade and investment also in turn began to drive sociopolitical reconciliation forward. Intraregional economic ties then further deepened and began to broaden, generating new economic interests that in turn transformed political affairs, as was clearly evident, for example, in cross-Straits and Sino-Japanese relations.

Adding Hong Kong and Taiwan to the trade equation, intraregional commerce has already vastly surpassed trans-Pacific commerce. In 2008, total trade among Japan, China, South Korea, Hong Kong, and Taiwan reached $1.25 trillion, while their aggregate trade with the United States was only $780 billion. The share of intraregional trade within Northeast Asia, with Hong Kong and Taiwan included, was almost 20 percent of the partners’ collective total in 2008, while the share of trans-Pacific trade was slightly over 12 percent of the total.5

At the country level, combined trade with Northeast Asian neighbors surpassed transactions with the United States for each of these three countries during 2003.6 China surpassed the United States as South Korea’s largest export market during 2004, and Japan’s in 2006.7 Meanwhile, U.S.-Japan trade was actually contracting in absolute terms from 2000 to 2004. Since then, bilateral trans-Pacific trade has modestly rebounded, yet remains significantly smaller than Japan’s intraregional trade with China and South Korea.

Corporate production networks are also deepening substantially across Northeast Asia, capitalizing on economic complementarities, as well as the remarkable concentration of industry within the compact physical space that constitutes the core of the region. Nowhere are production networks more dynamic today than across the Taiwan Straits, with Taiwanese investment on the Mainland exceeding $100 billion in 2005, and rising substantially since then.8 Those growing cross-Straits activities are intensifying regionwide competitive pressures that compel Korean and Japanese firms to expand cross-border production activities also, with a catalytic impact on regional integration. They are also making cross-Straits political rapprochement

easier, creating a virtuous political-economic cycle of declining tensions.

East-central China, with its rapidly growing consumer market, together with its expanding manufacturing and trading capacities, is steadily emerging as the center of gravity for these regional production networks. These networks converge especially—due to geographical proximity, organizational efficiency, and resource complementarity—on Shanghai, giving birth to the Shanghai Circle described above. They have important financial, technology, and marketing linkages, however, that connect them with far-distant parts of the world as well.

The strategic focus of major Japanese, Korean, and overseas Chinese companies that have established long-term investment sites in China is assembly and processing. Canon, for example, built its largest factory anywhere in the world at Suzhou, China, during 2001. By 2004, Canon had also established operation centers in Beijing, Shanghai, Guangzhou, and Dalian—at the heart of China’s four major economic regions. Mitsui, meanwhile, concluded more than 110 joint ventures in China. Matsushita runs about fifty factories and is adding more. The auto giants Honda and Toyota are both likewise becoming major manufacturers and marketers in China, giving their leaders new stakes in the reduction of regional political tensions.9

“Korea, Inc.” is investing even more aggressively in China than is Japan. Leading South Korean firms such as LG, Samsung, and Hyundai have made rapid progress recently in the People’s Republic of China (PRC), although they were late entrants into the Chinese market, long inhibited by Cold War political barriers and tensions that are now largely dissipated. Hyundai-made passenger cars, for example, entered the Chinese market only in 2003 but soon gained the lion’s share of Beijing’s taxi business, accounting for more than half of all new taxis commissioned during Beijing’s preparation for the 2008 Olympics.10 Small, efficient Hyundai autos have also penetrated taxi markets in other major Chinese cities.11

In electronics, LG did $10 billion in China business during 2004, a level that even the most prominent Japanese brands have rarely reached. In 2005, Samsung employed 50,000 Chinese workers at its twenty-nine Chinese affiliates. In that year, China became the third largest Samsung market worldwide. The company strategically positioned China not only as a major

market but also as a key production site for its global operations.12 Many small and medium-size Korean electronics companies have also moved manufacturing to the PRC, cooperating with Chinese companies in marketing, technology alliances, and manufacturing, in efforts to make inroads there.13

Direct investment flows within Northeast Asia, traditionally dominated by Japanese multinationals, are growing increasingly multilateral and balanced, with Chinese firms becoming active even inside Japan itself. Chinese companies have established numerous strategic partnerships with Japanese firms since 2000, beginning to offset the heavy converse flow of Japanese capital to China. The Shanghai Electric Group, for example, in 2002 acquired Akiyama, a bankrupt Japanese manufacturer of high-tech printers, and then also purchased the long-established machine tool maker Ikegai in 2004.14 In 2006 China’s Haier, which had announced a comprehensive alliance with Japan’s Sanyo four years earlier, took over Sanyo’s refrigerator production, which had long been unprofitable.15 Sanyo, in turn, focused its investment on complementary research and development, in an innovative new Northeast Asian division of labor.16

Other Chinese firms hire Japanese talent, reciprocating ongoing Japanese initiatives in China. Skyworth, a leading Chinese consumer electronics company, for example, hired one of Matsushita’s most senior engineers, together with several of his research colleagues.17 Huawei, a top Chinese telecom equipment manufacturer, recently established joint ventures with both NEC and Matsushita, pursuing advanced new third-generation (3G) mobile-phone technology.18

Increasingly symmetrical patterns of networking and cultural exchange are also emerging across Northeast Asia, helping to erode deep historical suspicions and to forge common new identities. Personal contact—ranging from intraregional telephone and mail communication to shipping and aviation, tourism, and television broadcast, as well as both legal and illegal migration—has risen rapidly in a variety of forms, political tensions notwithstanding. More than 4 million Japanese and Korean tourists visit each other’s country every year, over 4 million travel between China and Japan, and more than 3 million people move annually between China and Korea.19 Virtually all the personal-contact figures along the dynamic Northeast Asian triangle are much higher than a decade ago.

Some of the increased contact has marked political significance. Intergovernmental exchanges, including those among once bitter military adversaries, are rapidly rising, as are contacts among scholars. In May 2005, after three years of effort, for example, scholars in Japan, China, and Korea produced a joint history textbook, published in all three languages, that has sold well over 250,000 copies regionwide.20

Because of intensified investment and trade between China and Japan, Shanghai alone now has more than 40,000 Japanese residents. Japanese schools are operating in such major cities as Beijing, Shenzhen, and Shanghai. Statistics show that around 460,000 Chinese visited Japan and that over 3.45 million Japanese went to China in 2008.21 For Hong Kong youngsters, Japan has consistently remained their favorite travel spot.22 And even Kim Jong-il’s eldest son has apparently visited Tokyo Disneyland.23

Popular culture in Asia has also recently shown a strong regionalization trend. For nearly two decades, Japanese movies and television dramas have been enthusiastically received in China. According to one recent survey, 75 percent of audiences in Mainland China have watched the Japanese TV drama Akai Giwaku [Blood Suspect], while 73 percent have seen NHK’s Oshin. To Chinese viewers, Japanese drama has become a vivid symbol of stylish and modern urban culture. Meanwhile, in Taiwan, more than 80 percent of families currently receive Japanese TV channels by satellite, while 70 percent of audiences there watch Japanese shows at least four days per week.24

Japanese movies and television programs have also become popular in Korea, especially since former president Kim Dae-jung relaxed long-standing restrictions on Japanese programs following the Asian financial crisis. In 1998, when the movie Rabu Letah [Love Letter] was first shown in Korea, more than 1.45 million Koreans made a point of seeing it.25 Japanese music gained further visibility during 2000, when the South Korean government lifted restrictions on the local sale of Japanese pop, provided that the lyrics were not in Japanese.

In recent years, the Korean pop culture industry has steadily expanded its hold over East Asia. Hanryu, literally “Korean Wave,” has swept triumphantly across both China and Japan.26 In Mainland China, almost all forms of mass media broadcast Korean entertainment shows regularly, while

many TV stations set up special channels to broadcast Korean dramas. South Korean programs now account for more than all other foreign programs combined in the PRC, including those from the United States and Japan.27

Korean pop culture is also the rage in Japan. In 2001, when the Korean movie Ghost first opened, more than 1.2 million Japanese moviegoers saw it.28 The Korean program Winter Sonata, a love story starring Bae Yong-jun and Choi Jiwoo, took Japanese audiences by storm, becoming the local media sensation of the year during 2004. The Korean actor and singer Rain was another pan-Asian heartthrob. Ever since his debut in 2002, Rain, whose real name is Jung Ji-hoon, has been riding the Korean Wave. Through his leading roles in soap operas and his music, Rain has become the personification of hanryu, which some see as a highquality regional alternative to American cultural dominance. In 2005, Rain sold out arenas across Korea, China, and Japan, playing to more than 40,000 in Beijing and 20,000 at the Budokan in Tokyo.29

Chinese pop stars from Hong Kong and Taiwan, such as Teresa Teng, have captivated audiences in both Japan and South Korea for years. Recently, pop stars from Mainland China have also become quite visible across Northeast Asia. Chinese films and cultural shows are regularly broadcast in both Japan and Korea. Zhang Ziyi, for example, has played major roles in two Korean movies and one Japanese film. Her role, together with that of Chinese compatriot Gong Li, was memorable in the Hollywood-directed but Japan- based Memoirs of a Geisha. Indeed, a new, well-justified phrase is emerging across the region to describe these transnational entertainers: “Pan-Asia Stars.” And they are almost invariably from Northeast Asia, where the markets and the recording studios are predominantly located.30

Rising Interdependence in Northeast Asia Puts Pressure on the “Organization Gap”

Cultural confidence-building has a unique contemporary political- economic, and even geopolitical, importance in Northeast Asia, because of the embedded bitterness and estrangement among neighboring countries— even strategic allies such as Japan and South Korea—that so long prevailed. Such conciliatory efforts create a common base of understanding and contact, allowing natural communities of interest to begin to express themselves. They thus help to neutralize the perverse impact of a pronounced

“organization gap,” distinctive in comparative perspective, that has long prevailed in the region. Before 2000, for example, among the thirty largest economies in the world, twenty-five were already members of regional free- trade agreements or customs unions. The remaining five nonparticipant outliers were all located in Northeast Asia: China, Japan, South Korea, Taiwan, and Hong Kong.31

Thanks to the rapidly evolving multilateral frameworks in East Asia that emerged following the financial crisis of 1997, Northeast Asian economies joined in a number of “North-South” free trade agreements with nations elsewhere in East Asia. Japan established free trade agreement (FTAs), for example, with Singapore (2002), Malaysia (2003), Thailand (2007), the Philippines (2008), and Indonesia (2008). Korea formed an FTA with Singapore in 2006. China signed FTA treaties with ASEAN (2004, 2008), and with Singapore in March 2009. With Hong Kong and Macao, China also formed closer economic partnerships during 2003, following their reversion to Chinese administration a few years previously.

Nevertheless, the organization gap long persisted in Northeast Asia itself, where economic and social ties are most intimate, and the functional need for multilateral coordination correspondingly severe. According to the 2009 regional treaty agreement (RTA) dataset of the World Trade Organization, there were thirty-three RTAs in Europe. In Africa, South America, and the Middle East, where regional trade interdependence is far shallower than in Northeast Asia, the comparable RTA figures in 2009 were seven, three, and one, respectively.32 Yet Northeast Asia had no RTAs at all.

There are clearly strong pressures for change—for the closing of the organization gap—as economic interdependence rises, intraregional competition grows more intense, and divisive historical memories grow more distant. Some progress is being made, yet in the face of deepening transnational trade and investment relations worldwide, Northeast Asia will face serious future collective-action problems unless its fabric of local regional organizations grows even more robust. The Asian financial crisis of 1997–98, during which the lack of regional cooperative mechanisms both exacerbated a serious regional crisis and impeded its resolution, clearly showed the dangers of such a gap. So has the continuing—and deepening— environmental crisis confronting the region.

Northeast Asian countries also face serious and unique developmental challenges that would make a deeper and richer local network of regional organizations mutually advantageous. For example, Japan, Korea, and China all suffer from a severe shortage of readily accessible domestic energy reserves. Apart from Manchuria’s Daqing and Shengli fields, both well past their prime, none of these nations boasts a single major onshore oil or gas field.

Sustained economic development, meanwhile, has generated explosive energydemand growth across the region, leading to huge and rising energy- trade deficits with the broader world. Until late 1993, China was a net exporter of oil. Yet, a mere decade later, it had become the third largest importer in the world. Over the period from 2000 to 2004, China alone contributed nearly 40 percent of total global growth in oil demand. This pattern is likely to persist for the foreseeable future, as the prospects for sustained GDP growth in China appear strong, global financial volatility notwithstanding.33

Japan and South Korea are both long-time and large-scale energy importers. In 2000, the energy-import dependence ratio for Korea was 97.2 percent, and for Japan 81.2 percent. Japan has consistently been the second largest oil importer on earth, after the United States, while South Korea is the fourth largest oil importer and second largest importer of LNG in the world. Primary energy consumption composition is similar for the two countries: half of the total is petroleum, making their dependence on unstable Middle East oil supplies especially perilous.34

To compound Northeast Asian uncertainties, energy imports are less diversified than in many regions, with heavy local dependence on Middle Eastern oil and gas supplies. For instance, around 80 percent of Northeast Asia’s oil imports are from the Middle East, while the United States obtains only 23 percent of its oil from that volatile region. Asian oil-import dependence—and reliance on Middle Eastern supply in particular—are projected to grow rapidly over the coming decade, as alternative sources in areas such as Indonesia and Manchuria are progressively exhausted. For each of the Northeast Asian countries, national dependence on Middle Eastern sources is likely to grow as well.35

Among the catalysts that intensify Asian energy insecurity are Middle East

instabilities, transport vulnerability, and lack of alternative supplies. Northeast Asian countries rely heavily on Middle Eastern oil, despite that region’s dubious standing as the only part of the world more volatile than Northeast Asia itself. Some major Middle Eastern supplier countries, such as Iran, also face Western economic sanctions and embargoes. For Japan, Korea, and especially for China, oil transport from the Middle East to Northeast Asia likewise poses unsettling maritime security issues.

Especially sensitive to its own vulnerability, as a non-ally of an American “hyperpower” that dominates the sea lanes, China has grown quite active in seeking alternative energy supplies in Africa, Latin America, and even Canada.36 It thereby reduced its Middle East dependence by 2004 to 45 percent, compared with 72 percent for South Korea and 81 percent for Japan.37 In the process, China’s energy diplomacy has stepped on a few sensitive toes in the United States, either by undermining U.S. sanctions against “rogue nations” such as Sudan, or by dealing with Yankee-baiters close to U.S. shores, such as Hugo Chavez of Venezuela.

As in the case of energy, the financial system of Northeast Asia also harbors severe potential challenges for the region that make institutions for collective regional action desirable. First, the prevailing bank-based indirect- capital system could well trigger twin crises, either simultaneous or sequential, in the banking and currency areas—if provoked by external pressure.38 Second, Northeast Asian capital-flow patterns are extremely unbalanced, creating the danger of sudden, destabilizing shifts. The countries of the region hold huge U.S. dollar–denominated foreign exchange reserves yielding relatively low returns, while the region simultaneously acquires internally needed capital at much higher rates from international markets. Among the top five foreign exchange reserve holders in the world, four are located in Northeast Asia—China, Japan, Russia, and Taiwan. China and Japan hold the top two positions, with $2.4 trillion and $1.02 trillion, respectively, as of December 2009. South Korea, although strained by the 2008 global financial crisis, still took the sixth position with $270.9 billion. Hong Kong also managed to be the eighth largest foreign exchange holder in the world, with $240 billion.39

This massive U.S. dollar horde, concentrated increasingly in greater China, gives the region insurance against future financial crises of the 1997 variety. This new stability manifested itself clearly during the sharp global turbulence

of 2008–9. Northeast Asia’s huge dollar stockpile also renders the region vulnerable, however, to potential long-term dollar decline, in the face of ambitious recent U.S. stimulus measures and persistent current-account deficits. Depreciation of the U.S. dollar would not only devalue the massive local foreign exchange reserves of Northeast Asia but could also severely harm the trans-Pacific exports of the region, and seriously reduce potential national economic growth.40 Dollar decline, which began to occur in a serious way shortly after 2000, could also, however, ultimately strengthen the mutual reliance of Northeast Asian nations.

As Figure 1.3 suggests, the dollar has declined against all three major currencies in Northeast Asia since 2001. The Chinese renminbi’s appreciation against the dollar has been most persistent, sharply depreciating the local value of the PRC’s foreign exchange holdings of more than $2 trillion. The Japanese yen has also appreciated steadily against the dollar, albeit it with an aberration in 2007. The Korean won, suffering severely from the 2008/9 crisis, fell against the dollar during 2008 and early 2009, making the South Korean government especially anxious to find regional support in the face of global volatility induced by U.S. economic problems. By the fall of 2009, however, as the global crisis waned, the won had stabilized and begun to resume its upward long-term course.

FIG. 1.3. The U.S. Dollar’s Decline against Northeast Asian Currencies (2001–10). For each year, exchange rates are calculated as of June 1.

Exchange rates typically vary during the year. China used fixed exchange rates until June 2006, after which it gradually began to widen the parameters of permitted fluctuation of the Chinese yuan. Source: IMF financial data, at:

www.imf.org. Exchange Reserve Archives.

http://www.imf.org
The Waning of Constraints in History and Geopolitics As ancient enmities wane, Northeast Asia is becoming a more coherent

unit in its own right. Sino-Japanese and Japanese-Korean rapprochement are proceeding more actively than at any time in well over a century, while China and South Korea, deadly adversaries in the Korean War, are taking unprecedented steps in military confidence-building. The numerous recent state visits among the leaders of these three nations since late 2006—not to mention the constructive working-level dialogues now in progress across the East China Sea—all reflect deepening political ties between Tokyo and Beijing that have a solid economic basis. Relations between Tokyo and Seoul are also markedly improving, with moderate governments driven by economic logic and sensitive to regional solidarity issues prevailing in both countries.

Textbooks were a flashpoint between Japan and its continental neighbors for many years. Even as late as 2001 and 2005, the Japanese Ministry of Education’s approval of a single conservative text as an option for Japanese schools triggered massive protests in both China and Korea, even though the ultimate adoption rate reached only 0.03 percent. In April 2009, however, when the same textbook was approved once again, the reaction was distinctly muted.41

Another traditional security flashpoint, the cross-Taiwan Straits relationship, has also been evolving rapidly since early 2007. Indeed, deepening rapprochement between the two long-time adversaries in the Chinese civil war, and the economic possibilities unleashed by that easing of tensions, have suddenly become major drivers of Northeast Asian integration as a whole. With Democratic Progressive Party (DPP) leader Chen Shui-bian stepping down in May 2008 as the president of Taiwan, the newly elected Nationalist Party (KMT) candidate Ma Ying-jeou restored political understanding with the Mainland, driven by socioeconomic dynamics outlined elsewhere in this volume. Since then, passenger flights have been regularized between major cities across the Straits, including Taipei, Kaohsiung, Beijing, Shanghai, and Guangzhou, as well as Hefei, Harbin, Nanchang, Guiyang, Ningbo, and Jinan. The weekly number of cross-Strait passenger return flights, both regular and chartered, reached 292 as of January 2010.42 And the operations of major Taiwanese firms like Acer and Taiwan Semiconductor have grown rapidly on both sides of the Straits,

accelerating a historic cycle of deregulation and rising interdependence.

The number of Mainland visitors to Taiwan surged rapidly in late 2008, as restrictions on tourism began to ease. Between July 2008 and February 2009 alone, more than 91,000 Mainlanders visited Taiwan.43 Chinese premier Wen Jiabao even expressed his own strong personal interest in a sightseeing tour of scenic spots in Taiwan during a major Beijing press conference.44 In mid- 2009, daily tourist arrivals from the Mainland were averaging over 2,300 a day. And the numbers were steadily rising.45 During 2009, as a whole, more than 600,000 mainlanders visited Taiwan.46 In Taiwan, during the 2009 spring festival, thousands of local citizens flocked to see the two pandas especially dispatched from the Mainland,47 despite the politically delicate fact that the two creatures’ names together suggest reunion in Chinese (tuanyuan).

Policy coordination across the Taiwan Straits, like people-to-people relations, also revived and expanded substantially from the spring of 2008. In June of that year, only a week after being invited, the chairman of Taiwan’s Straits Exchange Foundation (SEF), Chiang Pin-kung, was in Beijing, actively negotiating new agreements on charter flights across the Straits. Five months later, in November 2008, the PRC’s return delegation, headed by former State Council Taiwan Office director Chen Yunlin, arrived in Taipei.48 There, four agreements were reached, finalizing the three long-awaited “direct links” (postal services, sea shipping, and air travel), while also coordinating trans-Straits policy on food safety.49

When Chen and Chiang met for the third time in Nanjing during April 2009, they signed three additional agreements: (1) an amendment to the previous understanding on air travel, increasing weekly flights from 107 weekly to 270 and adding more lines for direct flights; (2) a cross-Straits cooperative financial framework; and (3) an agreement to fight crime jointly and to undertake judicial cooperation. In addition, Chen and Chiang made joint declarations supporting Mainland investment in Taiwan.50 Since then, Beijing has outlined plans for encouraging Mainland Chinese businesses to expand their investments in Taiwan, and has scheduled several purchasing missions to buy food and consumer products.51

Northeast Asian governmental bodies will find it difficult to accommodate the status of Taiwan formally. Yet informal and semiformal policy coordination, as well as rapidly developing socioeconomic exchanges across

the Straits, is becoming ever more feasible, increasing the vested stakes in peace and prosperity on all sides, while making armed conflict ever more difficult. And declining prospects for armed confrontation, despite the formidable array of weaponry deployed, should in turn facilitate confidence and trust across the region, whose fragility for three generations has been a principal roadblock to the Making of Northeast Asia in political terms.

Many steps clearly remain to be taken along the road to peace and economic interdependence on the Korean peninsula. North-South rapprochement seems much further off than limited reconciliation between Taiwan and the PRC, which is already proceeding so dynamically. Yet there is no denying the massive potential consequences of change along the demilitarized zone (DMZ) in Korea, as a catalyst for deepened ties within continental Northeast Asia, or the significant long-term prospect that historic change in Korea will actually occur.

South Korea as it currently stands is, after all, a geostrategic island—cut off from the Asian continent by the dark, economically subterranean expanse of North Korea. Should North-South relations substantially improve, or reunification actually take place, the ties of all Korea, and possibly Japan, with China and Far Eastern Russia could obviously grow much more dynamic. The more central location of Taiwan in the region, however, almost directly opposite booming Shanghai, probably makes cross-Straits rapprochement more central to economic growth in Northeast Asia under almost any scenario than parallel developments in Korea.

The future of North Korea, and its regional orientation, at this writing, is difficult to predict. Despite its relatively moderate stance during the 2007–8 period, in the spring of 2009 Pyongyang tested a new Taepodong II missile, as well as a nuclear device, and resumed plutonium production at Yongbyon.52 A few months later it sent a conciliatory high-level delegation to Kim Dae-jung’s funeral in Seoul. The North also appears to be intensifying its economic ties with the PRC.53 No doubt an amicable resolution to the Democratic People’s Republic of Korea’s (DPRK’s) tortured relations with its neighbors would accelerate Northeast Asian integration. Yet the steadily deepening ties among Japan, China, and South Korea are not critically dependent on Pyongyang’s cooperation, or, indeed, on any substantial opening of North Korea. They run, as we shall see, on a very different, more cooperative track. Indeed, persistent tensions of all parties with North Korea

have over the past decade actually been a crucial catalyst for regional cohesion, by encouraging neighbors to collaborate in countering its provocative behavior, much as tensions with the Soviet Union helped to animate Western European integration during the 1950s. China and South Korea, for example, established a hotline between their air force headquarters in 2006, precisely to minimize dangers of accidental conflict between themselves provoked by North Korea.

Deepening Trilateral Policy Dialogue Each of the Northeast Asian countries, as we have seen, confronts two

pressing domestic developmental challenges—energy insecurities and financial vulnerability. Both of these challenges, emerging in the context of rising regional interdependence, generate a need, and a corresponding demand, for regional coordination.Yet the persistent organization gap within the region, inherited from a century of military conflict and ensuing mutual sociopolitical estrangement, makes it institutionally difficult to satisfy that demand. Other common regional problems, such as infrastructural development and environmental degradation, intensify still further the all- too-often unmet need for collective action. What then are the prospects for ultimately satisfying these urgent needs through regional institution-building?

The raw number of transnational institutions in East Asia as a whole has increased notably over the past decade, to be sure. Across the entire four- decade period from 1950 to 1989, the year that the Berlin Wall fell, only seven new regional institutions were established, while in the short fifteen years from 1990 to 2005, the number nearly tripled to twenty. The most active period for institution-building was from 1989 to 1997, with most of the new entities emerging in Southeast Asia. Recently, some conspicuous, albeit largely formalistic, regionwide bodies such as the East Asia Summit have been created. Yet an even more striking, novel, and efficacious phenomenon has been the widespread emergence of systematic Northeast Asian trilateral cooperation, often bilateral and inter-regional in form, although the organization gap still continues to prevail much more markedly there than in the Southeastern quadrant of Asia.

FIG 1.4 The Evolution of Northeast Asian Trilateral Dialogue, 2000-2009

At the subnational level, local, corporate, and epistemic linkages among Northeast Asian partners have continued to grow, even when political complications at the national and regional levels complicated formal diplomatic ties. Indeed, such subnational ties have often intensified, as in cross-Straits relations before 2007, or North-South relations in Korea at certain intervals, or in local ties between Hokkaido and Russia’s Sakhalin, precisely because higher-level ties were so complicated. Local government networks deepened, and multinational corporations intensified their transnational operations, both in spite of and sometimes because of political uncertainties. Transborder interaction within epistemic communities was also vibrant, with meetings customarily held in major cities of Northeast Asia, particularly Beijing, Shanghai, Tokyo, and Seoul. Semigovernmental institutions developed rapidly. The Boao and Jeju forums, headquartered in China and South Korea, respectively, regularly brought together politicians, bureaucrats, corporate representatives, and think tanks, with the explicit aim of expanding cooperation in various functional areas.

Northeast Asian subregional interactions are thus quite dynamic, and continuously evolving. More formal trilateral institutions are also rapidly emerging, despite the general perception that such bodies are overwhelmingly Asia-wide. At the national level, summits among top political leaders and senior bureaucrats of Japan, China, and South Korea have grown increasingly frequent. As suggested in Fig. 1.4, at many governmental levels trilateral gatherings remained frequent and productive from 2002 to 2005, even though trilateral summits in Northeast Asia were suspended because of Japanese prime minister Koizumi’s Yasukuni Shrine visits. Since 2006, major breakthroughs have been achieved in top level Sino- Japanese and Japanese-Korean bilateral relations as well. With new leadership in South Korea and Taiwan during 2008, and in Japan late in 2009, regional tensions have significantly declined, and cooperation across the region has gained even greater momentum.

During the critical year of 2008 itself, trilateral interaction and policy coordination rapidly deepened, propelled by the financial crisis. In May, the East Asian Foreign Exchange Reserve Bank expanded its reserves to $80 billion, with Japan, China, and South Korea contributing 80 percent of the

increase.54 In November, the finance ministers of the three nations met in Washington DC, on the sidelines of the IMF annual meetings, to broaden their bilateral currency-swap mechanisms with one another.55 They also regularized their trilateral central bankers’ dialogue in December.56 Thus, when the heads of government of the three countries convened in Fukuoka, on December 13, 2008, they credibly declared an intention “to promote the trilateral summit as a platform for the future,” substantiated by several new, concrete initiatives previously realized at lower bureaucratic levels.57 The leaders of these countries met once again in Beijing nine months later, pursuing these initiatives further, while reviving serious consideration of a trilateral FTA agreement, and a cross-investment accord.58

Prevailing Academic Pessimism about Northeast Asian Regionalism

Existing literature on Asian regionalism has generally emphasized Southeast Asian or Asia-wide institutions; it has largely overlooked the historic new regionalization trends in Northeast Asia that are outlined above.59 The conventional wisdom has long been markedly pessimistic about prospects for multilateral cooperation among China, Japan, and Korea, or across the Taiwan Straits, reflecting the deep-seated tensions of the past.60 Structural, institutional, and cultural features in the conflict-ridden Northeast, haunted by memories of a bitter history of conflict, are simply not conducive to regional cooperation, this literature maintained.61

It has been argued, for example, that power disparities are too pronounced to support equitable and cooperative international relations within Northeast Asia.62 China, it is alleged, is simply too much larger than the rest of Asia, in terms of demography and military strength, to make balanced mutuality possible. Economically speaking, Japan is likewise much more substantial and sophisticated than the second largest economy in Asia, China.63 To make matters even more difficult, it is argued, Asia as a whole lacks a common heritage of “community,” with the peculiar structure of state-society relations in key nations sadly hindering even today the emergence of a coherent formal regional framework.64 Cultural, linguistic, and religious differences further complicate regionalist development in Asia, the pessimists argue.

The picture of Northeast Asian comity presented in the prevailing literature is even gloomier than that prognosticated for Asia as a whole. Each of the

main countries of the Northeast Asian subregion—China, Korea, and Japan— conversely appears to privilege its relationship with the United States above intraregional ties. The U.S.-Japan alliance relationship appears formidable to many, allegedly intensifying Sino-Japanese tensions.65 Even China attaches preeminent strategic and economic importance to its bilateral ties with the United States, it is argued. Indeed, Beijing opened an ambitious new strategic dialogue with Washington in the summer of 2005 with no precedent in its previous relations with other Asian states. This bilateral Sino-U.S. dialogue has continued, in slightly different guise, into the Obama years.

Despite divisions on matters of detail, the U.S.-Korea military relationship likewise seems resilient, with the ROK providing the largest non–Anglo Saxon military contingent in Iraq for several years. Seoul, in June 2007, also formally concluded a free trade agreement with Washington, although its ratification was substantially delayed. Furthermore, anti-Japanese nationalist outbursts in China and Korea, such as those in the spring of 2006, long appeared to justify gloomy projections for the future Northeast Asian relationship, as did persistent uncertainties surrounding the future of North Korea and the cross-Straits relationship.

An Alternative View This book takes account of these conflictual intra-Asian patterns and

cooperative trans-Pacific interactions. Yet it departs from the conventional pessimism about Northeast Asian regionalism to document a more dynamic, if still only dimly perceived, new reality. That is the Making of Northeast Asia: initially a socioeconomic, yet increasingly a political and diplomatic, phenomenon replete with long-term strategic implications.

We first provide an alternative explanation for the organization gap in Asia from the end of World War II to the 1997 Asian financial crisis, using a critical-juncture analysis. The critical juncture of the Korean War, as will later be demonstrated, gave birth to a distinctive and fateful “hub-and- spokes” relationship between the United States and its allies in Japan and Korea, with China to join later, as a curious de facto member. The Asian partners of the United States were locked, albeit often benignly, into this hierarchical system for four long decades, carrying on their intraregional relations with one another largely through the Washington hub of the system. “Spokes to spokes” relations were both limited and fragile, especially in

Northeast Asia, where bitter, long-standing historical memories often compounded Cold War estrangement among the Northeast Asian states.

In Southeast Asia, fledgling regional organizations, such as SEATO and ASEAN, did begin to emerge, inspired by Cold War tensions. The Vietnam War, and then determination to contain Vietnam following the fall of Saigon in 1975 and Hanoi’s subsequent 1978 invasion of Cambodia, helped ASEAN to flourish, and to occupy a central role in regional affairs that transcended the political-economic strength of its members. Meanwhile, deep historical tensions, and the lack of a geopolitical rationale for cohesion, inhibited ties further north, despite substantial and deepening socioeconomic complementarities among China, Japan, and Korea.

Economic development and transnational economic relationships within Asia itself, we argue, increasingly challenged this “hub-and-spokes” system. Trans-Pacific trade ties confronted growing mutual irritants, beginning in the 1970s. Increasing difficulties in sustaining the U.S.-centric Asian financial framework, through which many local currencies were unrealistically dollar- pegged, eventually exploded in the 1997 Asian financial crisis.

The crisis represented another critical juncture for East Asian regional integration, comprehensively discussed in Chapter 4. For the first time in half a century, crisis-savaged Asian countries came together to confront a common economic challenge. Shared grievances against the International Monetary Fund, together with the World Bank’s insensitive handling of the Asian crisis, united all the countries of the region, with Northeast Asian powers—especially Japan and China—taking the principal initiative. In stimulating their mutual cooperation, the 1997 crisis helped to fuse new policy networks. Those in turn helped overcome historic isolation and estrangement, which were especially salient between Japan and the closest neighbors, thus hastening the Making of Northeast Asia in later years, as we shall see.

In the following two chapters, we find that the nascent subregional integrating mechanism, born in the wake of the Asian financial crisis, goes far beyond the broad Chiang Mai agreement. It involves at its core an increasing economic and psychological connectedness within Northeast Asia that is ultimately replete with political implications. Visions of a common Northeast Asian identity, with positive historical roots obscured by bitter

memories of war and colonialism, have re-emerged, after lying dormant for more than half a century. Epitomized in the thought of Sun Yat-sen, those visions gained renewed life and credibility following the 1997–98 financial crisis, which left the northeastern quadrant of Asia relatively more vigorous than its southeastern counterpart—and headed toward greater cohesion, even as it paid lip service to broader regional conceptions in a multitiered international system.

Beyond these general themes, we also engage in detailed country-specific analysis, concentrated in Chapters 7–10. Regional policies in China, South Korea, and to a lesser degree Japan have evolved substantially over the past two decades, most notably since the Asian financial crisis, helping each nation to transcend long-standing estrangement with its immediate periphery, and exploit latent mutual complementarity. The domestic politics of regionalism have changed substantially in each nation, as bitter memories fade and interdependence rises, with “regionalizing coalitions” giving new momentum to old ties with near neighbors. New local economic development policies are also promoting broader regional integration, especially in China. By examining these recent changes in both policy and political economy, we seek to explain the rising cohesion of Northeast Asia, sensitive to domestic factors, the external environment they confront, and the critical junctures that are bringing Mainland China, Taiwan, Japan, and the two Koreas closer once again.

The book closes by reviewing America’s historic approach to Northeast Asia, its changing political-economic ties with the region, and the implications thereof for policy. The U.S.—a neighboring power to Northeast Asia in geographic terms, has of course long been an indispensable regional actor—a “resident power,” in the words of U.S. Secretary of Defense Robert Gates66—with deep political-military roots in the western Pacific ever since World War II. Both Japan and South Korea have mutual security treaties with the United States, host American bases, and find the United States to be a substantial export market. Mainland China and Taiwan feel the economic attraction of the United States also.

Yet we find that America, despite its immense embedded leverage within the region, remains remarkably naive about Northeast Asia’s emerging internal political-economic trends. Many scholars and politicians in Washington know little of the subtly emerging cohesiveness and

connectedness in Northeast Asian economic relationships, and remain persistently suspicious of such Asian integration as they perceive. These views, even when they perceive plausible dangers, generally entail no cohesive response strategy, and neglect the economic rationale for a more integrated Asia. They also overlook potential American cooperative stakes in the increasingly cohesive Northeast Asia that is steadily and perhaps inevitably emerging, whether the United States likes it or not.

Our Contribution Publications on East Asian regionalism have proliferated in recent years.

We thus need to differentiate our work from that of other publications, and we can do so in several respects.

First, this book is consciously oriented toward theory-building, in contrast to a prevailing tendency, with some notable exceptions, toward descriptive or prescriptive treatments. We attempt to offer a more general theory for Asian institution-building, using the dynamic framework of critical-juncture analysis. In this formulation, three catalytic factors are argued to be important preconditions for regionalist development in Northeast Asia: (1) changing geostrategic context; (2) political leadership; and (3) crises, real or perceived. Asian decision-making tends to be reactive, we argue, with institutional innovation hence heavily reliant on leadership initiatives. Political-economic crisis, however, tends to greatly stimulate policy innovation, policy-network development, and initial determination of the policy initiatives that ultimately emerge, even though implementation itself may follow the crisis in question at a significant interval.67

This book is also distinctive in that it focuses analytically on prospects for Northeast Asian cooperation, rather than that of Asia more generally. It does, to be sure, discuss broader developments in East Asian regionalism to some degree, particularly when Northeast Asia has taken special initiative. It also touches on the broad Asia-Pacific regional relationship as a whole, in the course of considering narrower Northeast Asian regionalist tendencies, and Northeast Asia’s deepening leadership role in the broad Asian regionalist advances that do occur. Because of the relatively smooth progress for many years of multilateral regionalism relating to ASEAN, much of the current literature is naturally biased toward examining the “ASEAN Way.”68 Yet that approach, while once important and functional, is less and less relevant to

emerging political-economic realities, especially those unfolding over the past decade, as the locus of both economic growth and political-military uncertainty in Asia has moved further to the northeast.

Northeast Asia is not substantial only in geoeconomic terms. Just as important, it is increasingly becoming an identifiable economic, political, and strategic region in its own right—a globally significant yet little-recognized new development. Since 2001 the two principal economic “networks” of the region (overseas Chinese and Japanese production chains) have converged and transfused with each other on the Chinese Mainland, especially in the Shanghai area and China’s Northeast. Politically and strategically, the North Korean nuclear question, East China Sea energy disputes, and the Taiwan Straits issue are all intensely engaging the Northeast Asian countries. These controversies clearly have dangerous conflictual dimensions.Yet they also offer opportunities and incentives—precisely because of their danger—for network-building, and for cooperative attempts at resolution. Counterintuitively, yet consistent with the analytical framework developed here, tensions do appear to be nourishing a remarkably dynamic, if still subtle, institution-building process—replete with fateful global implications.

Third and finally, this book offers a detailed analysis of the domestic politics of regionalism in the three major nations of Northeast Asia (China, Japan, and Korea), as well as in the most important external actor, the United States. Employing comparative and historical methods, these country-specific assessments show how both politics and policies are evolving within each key nation, ultimately to enhance the prospects for closer cooperation among these key nations as a group. The book also inquires into how intellectuals and officials in these key countries regard regionalism in Asia more generally, and how their thinking resonates with civil society. Overall, it accents the remarkable parallelism that, interactive with economic trends, is quietly yet ineluctably bringing a new, more cohesive, and increasingly self- confident Northeast Asia into being.

2

Theories of Asian Institutional Development Changing Context and Critical Junctures Northeast Asia is paradoxically configured: on the one hand, the region enjoys sustained long-term growth and steadily increasing economic interdependence. Yet on the other, it is plagued by a fractious regional politics that all too often confounds potential cooperation. Despite the region’s demonstrable macroeconomic success, its collective economic management has been disappointing. Indeed, Northeast Asia has chronically failed to coordinate its own regional trade, financial, and environmental affairs in coherent fashion, or to protect itself from turbulence intruding from the broader world.

Northeast Asia’s distinctive “organization gap” has traditionally stood at the heart of these multiple difficulties, and has seriously impeded their resolution.1 Seen in comparative regional perspective, Northeast Asia long had the most pronounced formal organization gap of any such area on earth, amid a growing inadequacy of long-standing informal alternatives. In contrast to Western Europe, Southeast Asia, the South Pacific, or even the Middle East, Northeast Asia has never had a formal regionwide multilateral security structure, despite the manifest dangers of its situation. Until the late 1990s it was virtually devoid of regional economic or environmental organization as well. Even the Middle East, East Africa, and the Mediterranean Basin were more organized.2

Why did Northeast Asia for so many years lack formal regional institutions, despite the manifest need for coordination? What accounts for the important changes that have recently taken place, especially since the mid-1990s? This chapter presents a parsimonious answer to the contradictions of Northeast Asian regional organization, introducing and operationalizing the concept of “critical junctures” and incorporating changing political-economic context as well as the catalytic role of crises in

the overall analysis.

Before developing the critical juncture (CJ) notion and exploring its utility, it is important to understand the explanatory gap that needs to be filled. Prevailing literature on Northeast Asia’s regional-institutional environment was long based on comparison with European integration, and thus frequently overlooked parallel dynamics in other regions of the world. Causal mechanisms deduced solely from European experience are inadequate either to explain Northeast Asia’s organization gap or to predict future institutional trajectories of the region, but they do provide some useful intellectual benchmarks. Before turning to the critical-juncture model and its analytical utility, we will therefore briefly review regional institutional developments throughout the world, exploring both the mechanisms that created these institutions and the nature of the resulting institutional framework. A comparative understanding of regional institutions facilitates a better understanding both of the institutional gap in Northeast Asia and of the potential alternatives for addressing that gap.

Among the regions of the world, we select Europe, North America, and South America to illustrate the nature and processes of regional institution- building from a comparative perspective. All three regions have achieved an impressive degree of institutional development, with varying levels of intraregional political cohesiveness. There is also a significant body of scholarly literature that seriously examines regional institutions in those parts of the world, and that undertakes serious cross-regional comparison.3 A comparative review of such transnational organizations can help explain the original intellectual context for regionalism, while also providing insights into the functioning of the actual institutions themselves.

The Explanatory Gap in Current Literature Serious attempts to explain Northeast Asia’s organization gap have often

been based on European experience, flowing from two streams of thought: the realist paradigm and institutionalist frameworks.4 The realist tradition stresses the role of geostrategy in creating the gap. The contrasting institutionalist tradition explains the organization gap in terms of established norms and culture.5 Within the realist tradition, one group has focused on the bilateral distrusts among nations in the region, and the other has emphasized the inhibiting role of the United States, as an unwilling hegemon. The

institutional approach can be further broken down into one focusing on regime types and state-society relations, and another stressing cultural legacies and intellectual influences.

According to realists, power distribution among nations determines the profile of regional institutions. Power distribution in Europe, for example, has traditionally been quite even among major powers. All the bids for control by a single country have failed, because no country in Europe has had sufficient strength to prevail over all others in the region. Stability on that continent has been preserved by artful manipulation of the balance of power. Informed by European experience, realists see great-power balance as a precondition for regional institution-building more generally.6